With YHOO trading at or near new recent highs I thought it would be a good time to discuss the current structure we have, how we legged into it, and the scenarios for the trade going forward.
At the end of September and with YHOO stock just above 16 we thought there was a good chance that Yahoo stock became of interest to people again, with the sum of its parts worth more than the market seemed to think. We initiated a bullish position by buying the Jan 17.5 calls for 39c based on where we thought the stock could go and their cheapness from a vol perspective.
We got a rally in the stock soon after and looked to spread the calls, but with a twist. We sold the Dec 18 calls, which in hindsight was too tight, but the idea was that we could be in a great spot if the YHOO rally stalled and consolidated. This strategy would allow the Dec calls to decay at a faster rate than the Jan, setting up for the possibility that going into Dec expiration we could then roll the Dec calls to Jan… thus keeping a long on while continually selling premium against it as protection.
The stock continued on its upward trajectory and now we have a structure that is basically flat delta with the stock above our short Dec strike. We paid .17 for the structure and it is now worth about .56. The premium left in the trade is the difference between Dec and Jan, which is about 7c. So basically if the stock stayed in this area as we approach Dec expiration the trade will gain about 4 or 5 more cents as Dec decays faster than Jan. So basically .60 or so with stock here in a couple weeks. The structure is essentially locked in until expiration at these levels with a tiny bit more of decay to collect.
If the stock were to go back to 18, the trade either increases in value or decreases, depending on if it happened this week, or in 2 weeks, but not a massive change in either case. Here’s a risk chart from LiveVol X that shows the P&L if the stock went up or down, Red is today, Blue is Dec 19th. You’ll notice the trade is actually worth more towards expiration (blue) with the stock at 18, and worth less as it goes up at expiration, but this week (red) is essentially unchanged higher, but loses value lower towards 18:
If nothing changes as far as sudden moves in the stock, and without much risk in the trade, we’d likely let it get close to Dec expiration and then look at our options. If we did close Dec and then roll out to Jan by selling a higher strike, we’d essentially be making a bullish bet again, so we’ll cross that bridge when we get to it.